Conditions that Prompt Trade

This section explains Conditions that Prompt Trade, covering: Push Factors, Saturated Markets, Competition, Pull Factors, Economies of Scale, Risk Spreading, Possibility of Offshoring and Outsourcing and Extending the Product Life Cycle by Selling in Multiple Markets.

As businesses increasingly operate in an interconnected world, expanding into global markets has become a common strategy for growth. The decision to trade internationally can be driven by a variety of factors, which are generally classified into push factors and pull factors. These factors influence whether a business decides to enter new markets, either to overcome challenges in its home market or to take advantage of opportunities abroad. Additionally, businesses may also explore offshoring and outsourcing as part of their international expansion strategy. This section will cover the conditions that prompt trade, focusing on both push and pull factors, as well as the role of offshoring, outsourcing, and extending the product life cycle by selling in multiple markets.

Push Factors

Push factors are conditions that force businesses to look outside their domestic markets for new opportunities. These factors often arise from pressures within the home market that make international trade an attractive option.

Saturated Markets

One of the primary push factors for businesses seeking international expansion is a saturated domestic market. In mature markets, most potential customers may already be using the products or services offered by a business. As a result, growth in these markets becomes difficult, and businesses may struggle to maintain or increase market share.

For example, a mobile phone company operating in a developed country may find its domestic market saturated, with most people already owning a smartphone. In such cases, the company might look to international markets, especially emerging economies where smartphone penetration is still low, and there is significant room for growth.

• Low growth potential: When local demand plateaus, businesses must look beyond their borders to find new markets with higher growth potential. Without international expansion, businesses may face stagnation or declining revenues.
• Innovative solutions: Businesses may introduce new product lines or innovative versions of existing products to cater to global markets, giving them the chance to diversify and capture new customer bases.

Competition

Intense domestic competition can also serve as a push factor. In highly competitive markets, businesses may find it increasingly difficult to differentiate themselves or compete on price and quality alone. As competition increases, companies might look for international markets where the competitive landscape is less saturated or offers different challenges and opportunities.

For example, a fashion brand operating in a competitive market like the UK may find it hard to stand out amidst a large number of similar brands. To survive and grow, the brand could look to enter emerging markets, where there may be less competition or more demand for high-quality, Western-style fashion.

• Market dominance: Competing in multiple international markets can help businesses expand their reach, reduce over-dependence on a single market, and build brand recognition globally.
• Price pressure: International expansion allows companies to tap into new revenue streams, reducing the pressure to compete on price in a saturated or highly competitive home market.

Pull Factors

While push factors drive businesses to seek international markets, pull factors are those conditions that attract businesses to foreign markets, often offering specific advantages that make global trade an appealing opportunity.

Economies of Scale

A key pull factor is the ability to achieve economies of scale. As businesses expand their production and reach more customers, they can reduce their per-unit costs. By entering new markets and increasing output, businesses can spread their fixed costs (such as factory overheads, research and development, and marketing expenses) over a larger volume of sales, resulting in cost savings.

• Lower production costs: By increasing production and selling in multiple countries, businesses can negotiate better deals with suppliers, obtain raw materials at lower prices, and reduce unit costs.
• Enhanced competitiveness: As a business grows and achieves economies of scale, it can reinvest the savings into marketing, improving products, or cutting prices, making it more competitive both domestically and internationally.

For example, a global car manufacturer might sell vehicles in multiple countries, taking advantage of economies of scale to lower the cost per vehicle produced and improve profit margins.

Risk Spreading

Expanding into international markets can also help businesses spread risk. By operating in multiple countries, a business can diversify its revenue sources, reducing its exposure to economic downturns, political instability, or natural disasters in any one country.

• Geographical diversification: By operating in different regions, a business can hedge against the risk of economic slowdowns in its home country. For instance, if demand falls in one market due to recession or other issues, the business can still rely on revenue from other international markets.
• Market diversification: Diversifying across multiple product markets and consumer bases reduces a business's reliance on a single market. A business that exports to both the EU and Asia, for example, may have a more stable overall revenue stream.

In 2008, many global businesses found that their exposure to markets outside the US helped them mitigate the effects of the global financial crisis, as demand in emerging economies continued to rise even as markets in developed countries contracted.

Possibility of Offshoring and Outsourcing

In addition to expanding into new markets, businesses may also look abroad to offshore or outsource certain activities. These strategies can reduce operational costs, increase efficiency, and allow businesses to focus on their core competencies.

Offshoring

Offshoring refers to relocating certain business processes or manufacturing activities to a different country, often one with lower labour costs or a more favourable regulatory environment. By offshoring production, businesses can reduce costs and increase competitiveness.

For example, many companies in developed countries have offshored manufacturing to countries like China, India, and Vietnam, where labour costs are lower. This allows businesses to maintain lower prices while maintaining product quality.

• Cost advantages: Offshoring enables businesses to save on wages, taxes, and other overhead costs, thus improving their profit margins.
• Access to expertise: Some countries specialise in certain industries, and offshoring allows businesses to take advantage of specialised knowledge or technological expertise that may not be available in their home country.

Outsourcing

Outsourcing involves contracting out specific business functions or services to external providers, often based in foreign countries. Common areas for outsourcing include customer service, IT support, and human resources.

For example, many UK businesses outsource their customer service operations to countries such as India or the Philippines, where the cost of labour is lower but where skilled workers can still deliver high-quality services. Outsourcing allows businesses to focus on their core activities while benefiting from cost savings and increased operational efficiency.

• Focus on core activities: Outsourcing allows businesses to concentrate on their main areas of expertise, such as product development and marketing, while leaving non-core functions to external specialists.
• Improved efficiency: Outsourcing certain functions can result in more efficient operations, as specialised providers are often better equipped to handle specific tasks at a lower cost.

Extending the Product Life Cycle by Selling in Multiple Markets

Another reason businesses expand into international markets is to extend the product life cycle of their offerings. The concept of the product life cycle (PLC) suggests that all products go through stages: introduction, growth, maturity, and decline. By entering new international markets, businesses can introduce their products to a broader audience, effectively extending their product’s life cycle.

• New demand in different markets: When a product reaches the maturity or decline stage in its home market, it may still have growth potential in emerging or developing markets where demand is still rising.
• Innovation and adaptation: Businesses may adapt their products to fit the needs and preferences of consumers in different regions, which can reinvigorate demand and prolong the product’s profitability.

For example, a technology company may introduce a smartphone that is already in the maturity stage in its home country into emerging markets, where there is still growing demand for advanced mobile devices. The company may adjust the features or offer the product at a lower price to cater to local tastes, effectively extending the product's life cycle.

Summary

The decision to expand into global markets is influenced by both push and pull factors. Push factors, such as saturated markets and intense competition, can force businesses to look abroad for growth opportunities. Pull factors, like the potential for economies of scale and risk spreading, attract businesses to international markets. Furthermore, businesses may explore offshoring and outsourcing as ways to reduce costs and increase efficiency, while expanding into multiple markets can help extend a product's life cycle. In today’s interconnected world, understanding these factors and strategically navigating global markets is essential for businesses seeking sustainable growth and success.